The Changing Tax Climate for Notforprofits

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The Changing Tax Climate for Not-for-profits Cent
ral Association of College University Business
Officers October 14, 2008
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Objectives

• Education
• Background
• Risks
• New climate
• Redesigned Form 990 and IRS Focus Areas
• Governance
• Compensation Policies
• Transactions with Interested Parties
• Action Steps

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Background

• Sarbanes-Oxley Act enacted July 30, 2002
• Senate Finance Committee Recommendations June
  21, 2004
• Tax Law Changes
• Taxpayer Increase Prevention and Reconciliation
  Act, May 2005
• Pension Protection Act, August 17, 2006
• IRS Enforcement
• Electronic filing and data-mining
• Compliance Questionnaires
• 990 questions designed to trigger further action

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Recent Legislation and Activity on the Hill

• Directives from the Senate Finance Committee
• Endowments
• Cell phones and other mobile technology tools
• Donations
• Athletics
• Bonds

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IRS Enforcement

• College and University Compliance Initiative
• Implementing Guidelines for 2008
• Executive Compensation
• Community Colleges
• Tax-Exempt Bond Compliance Projects
• Governance Concerns

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(No Transcript)
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Areas of Risk

• Public Relations Stakeholders
• Donors
• Members
• Employees
• Competitors
• Press
• Unions
• Exempt Bond Ratings
• Banks
• Charity Navigator
• Whistle-blower organizations

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Areas of Risk

• Tax
• Maintenance of Tax Exempt Status
• Proper entity classification Sec. 501 (c)(1)
  (c)(28)
• Unrelated business income tax
• Excess benefits
• Related party transactions
• Proper disclosures (alternative investments)
• Foreign transactions
• Charitable substantiation requirements
• Employment Taxes
• Proper filings
• Reversion to private foundation status

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Redesigned Form 990

• Redesigned Form 990 available on IRS website
  www.irs.gov
• Redesigned Form 990 2nd release, December 19,
  2007
• Change in format
• Some transitional relief
• Final Instructions released 08/19/2008
• Effective date 2008
• Calendar yearend 12/31/08
• Fiscal yearend 6/30/2009

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Redesigned Form 990
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Redesigned Form 990

• Key Considerations
• Significantly expanded
• Shift from an accounting report to an
  activities report
• Requires participation and input of many more
  organization officials
• Transparency into the activities of the
  organization
• Data-mining and IRS electronic enforcement
  initiatives
• Easy access to organization data

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Areas of Interest Governance

• Panel on the Nonprofit Sector Principles for
  Good Governance and Ethical Practice
• Legal Compliance Public Disclosure
• Effective Governance
• Strong Financial Oversight
• Responsible Fundraising

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Focus on Governance

• Good governance of a not-for-profit organization
  leads
• to compliance. Bad governance leads to trouble.
• Steve Miller, commissioner of the Tax Exempt and
  Government
• Entities division of the IRS
• April 23, 2008
• Georgetown Law Conference

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Legal Compliance and Public Disclosure

• Principle No. 1
• Compliance with the law page 6, questions 10,
  17-20.

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Legal Compliance and Public Disclosure

• Principle No. 2
• Written code of ethics page 3, questions 25 a
  b page 6, questions 2-3.

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Legal Compliance and Public Disclosure

• Principle No. 3
• Conflict of interest policy page 6, questions
  12 and 15.
• Question 12c Schedule O Description
• An explanation of which persons are covered under
  the policy
• The level at which determinations of whether a
  conflict exists are made
• The level at which actual conflicts are reviewed.

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Legal Compliance and Public Disclosure

• Page 4, question 28 Schedule L

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Family/Business Relationships

• Family Relationship
• Spouse, ancestors, children, grandchildren,
  great-grandchildren
• Business Relationship
• Employment or contractual relations between
  trustees with which one was associated as a
  trustee, director, officer, key employee, or
  greater-than-35 owner.
• One person was involved with the other in one or
  more contracts of sale, lease, license, loan,
  performance of services, or other business
  transactions involving transfers of cash or
  property valued in excess of 5,000 in the
  aggregate during the tax year. Also included are
  transactions with an organization with which the
  other person was associated as a trustee,
  director, officer, key employee, or
  greater-than-35 owner.
• The two persons were common owners in a business
  or investment entity in which they, individually
  or together, possessed a greater-than-35
  ownership interest and each held an interest
  greater than 2.

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Legal Compliance and Public Disclosure

• Principle No. 4
• Whistleblower policy page 6, question 13.
• Principle No. 5
• Document retention policy page 6, question 14.

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Legal Compliance and Public Disclosure

• Principle No. 6
• Ensure organization has adequate plans to
  protect its assets, page 6, question
• Principle No. 7
• Public disclosure of information page 6,
  questions 18-20.

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Effective Governance

• Principle No. 9
• Conduct regular meetings, page 6, question 8
• Principle No. 12
• Majority of board should be independent, page 1,
  page 6.

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Effective Governance

• Independence
• Member is not compensated as an officer or other
  employee of the organization or a related
  organization
• Member did not receive compensation or other
  payments exceeding 10,000 for the year from the
  organization or from related organizations as an
  independent contractor
• Member did not otherwise receive, directly or
  indirectly, material financial benefits (gt
  50,000) from the organization or related
  organizations
• Member did not have a family member that received
  compensation or other material financial benefits
  from the organization or related organizations
• Treasury Regulation Section 53.4958-6(c)(1)(iii).

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Effective Governance

• Principle No. 13
• Hire, oversee, and evaluate CEO page 6,
  question 15.
• Principle No. 19
• Review organizations mission and goals at least
  every five years page 1, question 1 page 2,
  question 1.

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Effective Governance

• Principle No. 20
• Board members should serve without compensation

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Definition of Key Employee

• Three prong definition Only those persons other
  than officer, director or trustee, who
• Had reportable compensation exceeding 150,000
  for the year
• Had or shared organization-wide control or
  influence similar to an officer, director or
  trustee, or managed or had authority over at
  least 10 of the organizations activities and
• Were within that group of organizations top 20
  highest paid persons for the year who satisfied
  both the 150,000 test and the responsibility
  test.

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Strong Financial Oversight

• Principle No. 21
• Board should receive and review timely reports
  of the organizations financial activities page
  11, question 2.

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Strong Financial Oversight

• Principle No. 23
• No loans with directors, officers, or trustees
  page 11, questions 6 and 22 Schedule L.

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Strong Financial Oversight

• Principle No. 24
• Budget should be spent on the organizations
  mission page 1.

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Strong Financial Oversight

• Principle No. 25
• Clear, written policies for travel
  reimbursements Schedule J, questions 1 and 2.
• Principle No. 26
• No payment of companion travel or other
  excessive perks Schedule J, question 1.

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Other Schedules

• Schedule D
• Expansion of balance sheet
• Donor advised funds
• Details of investments
• Description of endowments
• FIN48 (Accounting for Uncertain Tax Positions)
  description

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Responsible Fundraising

• Principle No. 27
• Clear, truthful solicitations Schedule G,
  question 1.

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Responsible Fundraising

• Principle No. 29
• Facilitate donors compliance with tax law
  requirements page 5, questions 6-7.

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Responsible Fundraising

• Principle No. 30
• Adopt clear policies on acceptance of gifts to
  ensure consistency with the organizations
  ethics, financial circumstances, program focus,
  or other interests Schedule D, questions 5-6
  Schedule M, question 31.

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Responsible Fundraising

• Principle No. 32
• Fundraisers should not be compensated by
  commission Schedule G

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Other Schedules

• Schedule O
• Blank paper
• Use as required and referenced through Form 990
• Use as opportunity to speak to stakeholders

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Action Steps
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Reorientation for Exempt Organizations

• Paradigm Shift
• Form 990 is not a tax return!
• Certification of compliance with exempt status
• Understand the focus areas from an IRS
  perspective
• Public Relations
• Public disclosure requirements
• What does the form tell your stakeholders?

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Contact Information

• Edward Jennings, CPA
• Tax Manager
• University of Michigan
• Ann Arbor, Michigan 48109
• ejenning_at_bf.umich.edu
• Geralyn Hurd, CPA
• Crowe Horwath LLP
• 70 W. Madison, Chicago, IL 60601
• [phone]
• geralyn.hurd_at_crowehorwath.com